Davis v. HSBC Bank ( 2009 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GARY DAVIS, an individual on 
behalf of himself; GARY DAVIS, as
Private Attorney General and on
behalf of all others similarly
situated,
Plaintiffs-Appellees, No. 08-57062
v. D.C. No.
HSBC BANK NEVADA, N.A., a  2:08-CV-05692-
national bank; HSBC FINANCE GHK-JC
CORPORATION, a Delaware OPINION
corporation; BEST BUY CO., INC., a
Minnesota corporation; BEST BUY
STORES, L.P., a Virginia limited
partnership,
Defendants-Appellants.

Appeal from the United States District Court
for the Central District of California
George H. King, District Judge, Presiding
Argued and Submitted
February 9, 2009—Pasadena, California
Filed February 26, 2009
Before: Andrew J. Kleinfeld, Carlos T. Bea, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Bea;
Concurrence by Judge Kleinfeld
2779
2782 DAVIS v. HSBC BANK NEVADA
COUNSEL
Stuart M. Richter and Gregory S. Korman, Katten Muchin
Rosenman LLP; for the defendants-appellants.
Drew E. Pomerance and Erin M. LaBrache, Roxborough,
Pomerance & Nye LLP; for the plaintiffs-appellees.
OPINION
BEA, Circuit Judge:
Defendants appeal the district court’s order granting plain-
tiff Gary Davis’s motion to remand Davis’s putative class
action to state court.1 The only issue on appeal is whether Best
Buy, a nationwide electronics retailer, has its principal place
of business in the state of California. We reverse.
Plaintiff Gary Davis, as a private attorney general on behalf
of himself and a putative class of similarly situated California
consumers, sued HSBC Bank Nevada, N.A., HSBC Finance
Corporation, Best Buy Company, and Best Buy Stores, L.P.
in California Superior Court and alleged claims for unfair
competition under Cal. Bus. & Prof. Code § 17200, false
advertising under § 17500, and common law fraud in the
nature of concealment. Davis’s complaint alleges the defen-
dants defrauded California customers by offering credit cards
without adequately disclosing the annual fee the customers
would be charged for use of the card.
1
We have jurisdiction over this interlocutory appeal under 28 U.S.C.
§ 1453(c)(1).
DAVIS v. HSBC BANK NEVADA 2783
The defendants removed the action to federal district court
and based on the Class Action Fairness Act of 2005
(“CAFA”). Davis filed a motion to remand the action to state
court and contended that the local controversy exception, 28
U.S.C. § 1332 (d)(4),2 barred the exercise of federal jurisdic-
tion. The district court granted the motion to remand, and the
defendants timely appealed.
The only issue on appeal is whether Best Buy Stores has its
principal place of business in California. If not, Best Buy
Stores is not a citizen of California, the local controversy
exception does not apply, and federal jurisdiction under
CAFA exists. We conclude Best Buy Stores does not have its
principal place of business in California.
[1] A limited partnership or a corporation is a citizen of (1)
the state under whose laws it is organized or incorporated; and
(2) the state of its “principal place of business.” 28 U.S.C.
§ 1332(c)(1). In this circuit, we apply two tests to determine
the state of a corporation or partnership’s principal place of
business. First we apply the “place of operations” test. Under
that test, a corporation’s principal place of business is the
state containing “ ‘a substantial predominance of corporate
operations.’ ” Tosco Corp. v. Communities for a Better Env’t,
236 F.3d 495, 500 (9th Cir. 2001) (per curiam) (quoting
Indus. Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th
Cir. 1990)). If no state contains a “substantial predominance”
of corporate operations, we apply the “nerve center” test,
which locates the corporation’s principal place of business in
2
The local controversy exception bars the exercise of federal jurisdic-
tion when greater than two-thirds of the class members are citizens of the
state in which the action was originally filed, the principal injuries about
which the plaintiffs complain occurred in the state in which the action was
originally filed, and at least one defendant, from whom significant relief
is sought and whose conduct forms a significant basis for the claims
asserted, is a citizen of the state in which the action was originally filed.
28 U.S.C. § 1332(d)(4).
2784 DAVIS v. HSBC BANK NEVADA
the state where “the majority of its executive and administra-
tive functions are performed.” Id.
[2] Determining whether a “substantial predominance” of
a corporation’s operations take place in a given state “plainly
requires a comparison of that corporation’s business activity
in the state at issue to its business activity in other individual
states.”3 Id. We employ a number of factors to determine if a
given state contains a substantial predominance of corporate
activity, including: “the location of employees, tangible prop-
erty, production activities, sources of income, and where sales
take place.” Id. Substantial predominance does not require the
majority of the corporation’s operations to occur in a single
state, but the corporation’s activity in one state must be “sub-
stantially larger” than the corporation’s activity in any other
state. Id.
Applying this standard, the district court concluded Best
Buy Stores had a “substantial predominance” of its activities
in California. Best Buy Stores has more stores in California
than in any other state, more employees in California than in
any other state, and more sales in California than in any other
state. As the district court explained, “California has 15%
more stores, 40% more employees, and 46% more sales than
Texas, the second highest state.”
[3] The substantial predominance test does not require that
a majority of corporate operations occur in a single state. But
the test requires a “substantial” predominance, not mere pre-
dominance. In Tosco, for example, we held that a gasoline
manufacturer and retailer was a citizen of California when
21% of its employees, nearly 50% of its refining capacity,
half its lubricant blending facilities, 35% of its retail loca-
tions, 15% of its convenience stores, and 35% of its invento-
3
Were we writing on a clean slate, we would find much in favor of the
rule suggested by the concurrence. But we see ourselves as bound by the
holding in Tosco.
DAVIS v. HSBC BANK NEVADA 2785
ries were located in California. 236 F.3d at 501-02. In that
case, the defendant also had management operations in Cali-
fornia and, in previous litigation, had maintained that it was
a citizen of California. Id. at 502-03. Tosco’s operations
reflected not only that it had more operations in California
than in any other state, but that it had substantially more oper-
ations.
Accordingly, we have stated that when a corporation has
operations spread across many states, the nerve center test is
usually the correct approach. Breitman v. May Co. Cal., 37
F.3d 562, 564 (9th Cir. 1994) (“May Company has corporate
operations in over thirty states. Because no one state contains
a substantial predominance of the corporation’s business
activities, the place of operations test inappropriate.”). Cf.
Industrial Tectonics, 912 F.3d at 1093 (“ITI’s operations are
divided between only two states: California and Michigan.
ITI’s operations are not so spread out that one must look to
the corporate headquarters to find a principal place of busi-
ness . . . .”). When a corporation’s activities are spread over
many states, it is much less likely operations in any one state
will “substantially” predominate over operations in other
states.
[4] We have not previously given precise definition to the
meaning of the term “substantially” in the substantial predom-
inance test. We do not here adopt any hard and fast rule or
percentage by which the operations in one state must exceed
those in other states. But in determining whether a corpora-
tion’s operations “substantially” predominate, we must take
into consideration both the nature of the corporation’s busi-
ness activities and the purposes of the corporate citizenship
statute. The purpose of diversity jurisdiction, and the citizen-
ship determinations associated with it, is to avoid the effects
of prejudice against outsiders. Industrial Tectonics, 912 F.2d
at 1094. Thus, the term “substantially” must be defined with
an eye to ensuring that a corporation is a citizen of the place
in which it is least likely to suffer prejudice. See id.
2786 DAVIS v. HSBC BANK NEVADA
[5] It is clear that Best Buy Stores’ California operations
predominate over its operations in other states. But we cannot
say that these operations “substantially” predominate over
Best Buy Stores’ operations in other states. Best Buy Stores
is a nationwide retailer with stores in 49 states, the District of
Columbia, and Puerto Rico. At most, the statistics demon-
strate that Best Buy Stores’ California retail activities roughly
reflect California’s larger population. If a corporation may be
deemed a citizen of California on this basis, nearly every
national retailer—no matter how far flung its operations—will
be deemed a citizen of California for diversity purposes. Such
a result is untenable. With operations distributed widely
across the country, Best Buy Stores is no more familiar to
Californians than it is to Texans or Illinoisans, and hence no
less likely to suffer prejudice in California than elsewhere.4
[6] We do not require that courts apply a per capita
approach to determining a corporation’s principal place of
business in every case. However, we hold that a nationwide
retailer with operations spread across many states will be a
citizen of California only when a substantial predominance of
its activities are located in California; it will not be a citizen
of California merely because its operations in California cater
to California’s larger population.
Accordingly, we reverse the judgment of the district court
and remand the case for further proceedings consistent with
this opinion.
REVERSED and REMANDED
4
Indeed, both of these states have more Best Buy stores per capita than
does California. Best Buy has fewer stores in California per person than
it does on average nationwide.
DAVIS v. HSBC BANK NEVADA 2787
KLEINFELD, J., writing separately:
I concur in the result. My reasoning is somewhat different.
The majority opinion extends Tosco Corp. v. Communities
for a Better Environment1 beyond its facts. In my view, Tosco
was overwritten, and I would confine it to its facts. In Tosco,
an oil company was suing an environmental advocacy group
for defamation and related torts, and claimed to be a citizen
of Connecticut in order to get diversity jurisdiction.2 We
affirmed a district court decision, which held that the oil com-
pany had its principal place of business in California, and
adopted as our own the district court decision, rather than
writing a decision independently.3 The most striking fact in
the case, more than the difference in percentage of refineries,
gas stations and employees between one state and another, is
that Tosco had itself successfully claimed in previous litiga-
tion that its principal place of business was California.4 All
that the district court and we had to decide in Tosco was
whether some corporate changes in the three years between
the two lawsuits changed the oil company’s citizenship. The
corporate changes did not amount to enough to change its citi-
zenship. A district court decision often includes, quite prop-
erly, multiple reasons for affirmance, but an appellate
decision has different purposes. We should have picked the
best reason, that Tosco was still a citizen of the state where
three years earlier it successfully claimed to be one. Since we
did not, we must struggle with Tosco and follow it if it
applies, but I think we could confine Tosco to its facts and
distinguish it.
1
236 F.3d 495 (9th Cir. 2001) (per curiam).
2
Id. at 497, 500.
3
Id. at 497. Compare id. at 497-502 with Tosco Corp. v. Cmtys. for a
Better Env’t, 41 F. Supp. 2d 1061 (C.D. Cal. 1999).
4
Id. at 502.
2788 DAVIS v. HSBC BANK NEVADA
We held in Industrial Tectonics, Inc. v. Aero Alloy that the
a corporation’s “principal place of business” is “where a
majority of a corporation’s business activity takes place in
one state.”5 Tosco says the opposite, that the “principal of
business” “does not require the majority of a corporation’s
total business activities to be located in one single state, but
instead, requires only that the amount of [the] corporation’s
business activity in one state be significantly larger than any
other state in which the corporation conducts business.”6
Without the per capita qualification the majority articulates,
that means that the “principal place of business” of most
national corporations would be in the most populous state,
California. Even with it, this approach makes the wrong com-
parison, largest to next-largest state, instead of the right one,
state to everywhere the business operates, to determine “prin-
cipal place of business” by the “place of operations” test.
Comparing one state to another unreasonably lends itself to
designating a “principal place of business” with the “place of
operations” test when the “nerve center” test ought to be used.
There is no reason why the burden of proof should be on the
party urging use of the “nerve center” test, or why the “place
of operations” test ought to be the default.7 For a national cor-
poration, the opposite presumption makes more sense. The
Seventh Circuit uses only the “nerve center” test.8 There can
5
912 F.2d 1090, 1092 (9th Cir. 1990) (emphasis added); see also Mon-
trose Chem. Corp. of Cal. v. Am. Motorists Ins. Co., 117 F.3d 1128,
1134-35 (9th Cir. 1997) (following the “majority” holding in Industrial
Tectonics); Danjaq, S.A. v. Pathe Commc’ns Corp., 979 F.2d 772, 776
(9th Cir. 1992) (following the “majority” test from Industrial Tectonics).
6
Tosco, 236 F.3d at 500.
7
See Tosco, 236 F.3d at 499.
8
See, e.g., Metro. Life Ins. Co. v. Estate of Cammon, 929 F.2d 1220,
1223 (7th Cir. 1991). The First, Second, and Fourth Circuits apply the
nerve center test when a corporation’s operations are decentralized and
spread across multiple states. See, e.g., Diaz-Rodriguez v. Pep Boys Corp.,
410 F.3d 56, 61 (1st Cir. 2005); Athena Auto., Inc. v. DiGregorio, 166
F.3d 288, 290-91 (4th Cir. 1999); R.G. Barry Corp. v. Mushroom Makers,
Inc., 612 F.2d 651, 655 (2d Cir. 1979).
DAVIS v. HSBC BANK NEVADA 2789
only be one “principal place of business,” and for a corpora-
tion that operates in multiple states “principal” does not
merely mean the state with more of some activities than any
other individual state. State-to-state comparison, as suggested
in Tosco and followed by the majority, only assures identifi-
cation of the state that has “substantially” more than the state
it is compared to. Identification by this comparison of the
state that substantially predominates for the entire corporation
(which, as “principal” suggests, is what we are trying to iden-
tify) will have little to do with the correctness of the method-
ology, and more to do with fortuity. Rather than limiting
application of what is plainly the wrong test for national cor-
porations (the place of operations test), the majority opinion
extends Tosco. This extension generates excessive unpredict-
ability and encourages expensive litigation to identify the
“principal place of business” for corporations that operate in
multiple states. One great appeal of the nerve center test is
that it is generally faster, more certain, and cheaper to apply
than the place of operations test.
FACTS
Plaintiff Gary Davis sued Best Buy and HSBC, the bank
that issues the Best Buy credit card, in the Superior Court of
the State of California. The complaint claims that Best Buy
and HSBC defrauded their California customers by offering
them credit cards without adequately disclosing the annual fee
they would be charged. The case was brought as a class
action, on behalf of all Californians who obtained the credit
card and were charged a fee. The defendants removed the
case to the United States district court pursuant to 28 U.S.C.
§ 1453(b),9 a provision of the Class Action Fairness Act of
2005.10
9
28 U.S.C. § 1453(b); see Abrego Abrego v. Dow Chem. Co., 443 F.3d
676, 681 (9th Cir. 2006) (explaining the relationship between 28 U.S.C.
§ 1332(d) and § 1453(b)).
10
Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified as amended in scat-
tered sections of 28 U.S.C.).
2790 DAVIS v. HSBC BANK NEVADA
All that matters on appeal is whether Best Buy is a citizen
of the State of California. There are actually two Best Buy
defendants in this case, a corporation that is a holding com-
pany, and a limited partnership that owns and operates the
national chain of Best Buy retail stores. The parties do not put
at issue the holding company’s Minnesota citizenship. They
dispute only whether the limited partnership is a citizen of Cali-
fornia.11 The limited partnership operates retail stores in 49 of
the 50 states, plus Puerto Rico and the District of Columbia.
The stores sell consumer electronics such as television sets
and computers, video games, DVDs, cameras, and home
appliances.
Generally, a company is a “citizen” of at most two states,
the state of incorporation for corporations12 or state of organi-
zation for unincorporated associations,13 and the state where
it has its “principal place of business.”14 Since Best Buy is
organized under the laws of Virginia,15 and is therefore a citi-
11
Since only the citizenship of the limited partnership is at issue, “Best
Buy” will be used to refer to the limited partnership, Best Buy Stores L.P.,
unless otherwise indicated.
12
We do not consider corporations incorporated in multiple states or
address whether such corporations are citizens of every state in which they
have been incorporated. See Charles Alan Wright et al., 13B Federal Prac-
tice and Procedure § 3626 (2d ed. & Supp. 2008).
13
28 U.S.C. § 1332(d)(10) (“For purposes of this subsection and section
1453, an unincorporated association shall be deemed to be a citizen of the
State where it has its principal place of business and the State under whose
laws it is organized.”) The Best Buy limited partnership is organized under
the laws of Virginia. For qualifying class actions such as this one, CAFA
abrogates the traditional rule that an unincorporated association shares the
citizenship of each of its members for diversity purposes, and renders
inapplicable the procedure in Federal Rule of Civil Procedure 23.2, which
generally determines whether a federal court has subject matter jurisdic-
tion over an action involving an unincorporated association. See Wright et
al., supra note 12, at § 3630, at 667.
14
Id. § 1332(c)(1) (providing that “a corporation shall be deemed to be
a citizen of any State by which it has been incorporated and of the State
where it has its principal place of business”).
15
Cf. § 1332(d)(10).
DAVIS v. HSBC BANK NEVADA 2791
zen of Virginia, the only issue is whether its “principal place
of business” is California.16 The argument for California citi-
zenship is basically that Best Buy operates more stores,
employs more people, and sells more goods in California than
in any other state. All of this is true. The argument against is
basically that California is only a small part of Best Buy’s
national operations, sales, and workforce, and its national
locus of decision making is in Minnesota. This is also true.
There can be only one “principal place of business” for
diversity purposes, which of course is what the word “princi-
pal” implies.17 Best Buy has about 11% of stores, 13% of
sales and 13% of employees in California, compared with
about 10% of stores, and 9% of both sales and employees in
its next-most active state (Texas). This works out to be
roughly 16% more stores, 45% more sales, and 45% more
employees than Texas. Though its California business greatly
exceeds its Texas business, Best Buy does 87% to 89% of its
business and has all of its central management outside of Cali-
fornia. “Principal,” the statutory term, means principal for the
corporation’s entire business, not “more than any other single
state.”
ANALYSIS
Under our precedents, we use the “place of operations” test
16
We apply the same tests to determine the “principal place of business”
for corporations and unincorporated associations. See, e.g., United Com-
puter Sys., Inc. v. AT&T Corp., 298 F.3d 756, 763 (9th Cir. 2002).
17
Because we interpret the term “principal place of business,” this hold-
ing applies to both corporations and unincorporated associations. See 28
U.S.C. § 1332(c)(1) & (d)(10) (providing that for the purposes of CAFA
an unincorporated association “shall be deemed to be a citizen of the State
where it has its principal place of business); see, e.g., Capitol Indem.
Corp. v. Russellville Steel Co., 367 F.3d 831, 836-37 (8th Cir. 2004); Gaf-
ford v. Gen. Elec. Co., 997 F.2d 150, 161 (6th Cir. 1993); J.A. Olson Co.
v. City of Winona, 818 F.2d 401, 406 (5th Cir. 1987); cf. Breitman v. May
Co. Cal., 37 F.3d 562, 564 (9th Cir. 1994).
2792 DAVIS v. HSBC BANK NEVADA
to determine a corporation’s “principal place of business” if
(and only if) one state has a “substantial predominance” of the
corporation’s business activities.18 If no state has a “substan-
tial predominance” we use the “nerve center” test to deter-
mine that corporation’s “principal place of business.”19 Our
sister circuits generally apply some combination of the nerve
center,20 the “corporate activities” or place of operations,21 and
the “total activity” tests.22 Despite varying verbal formulas,
18
Tosco Corp. v. Cmtys. for Better Env’t, 236 F.3d 495, 500 (9th Cir.
2001) (per curiam); see also United Computer Sys., 298 F.3d at 763; Mon-
trose Chem. Corp. of Cal. v. Am. Motorists Ins. Co., 117 F.3d 1128, 1134
(9th Cir. 1997); Breitman, 37 F.3d at 564.
19
See Tosco, 236 F.3d at 500.
20
The Seventh Circuit applies the nerve center test. See, e.g., Metro. Life
Ins. Co. v. Estate of Cammon, 929 F.2d 1220, 1223 (7th Cir. 1991).
21
The Third Circuit applies a variant of the place of operations test,
which it calls the “center of corporate activities” or “operating assets” test.
See, e.g., Mennen Co. v. Atl. Mut. Ins. Co., 147 F.3d 287, 291 (3d Cir.
1998); Kelly v. U.S. Steel Corp., 284 F.2d 850, 853-54 (3d Cir. 1960). It
primarily looks for “the headquarters of day-to-day corporate activity and
management.” See Mennen, 147 F.3d at 291. The First, Second, and
Fourth Circuits have adopted both the nerve center test and place of opera-
tions test. See, e.g., Diaz-Rodriguez v. Pep Boys Corp., 410 F.3d 56, 61
(1st Cir. 2005); Athena Auto., Inc. v. DiGregorio, 166 F.3d 288, 290-91
(4th Cir. 1999); R.G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d
651, 655 (2d Cir. 1979); see also Mullins v. Beatrice Pocahontas Co., 489
F.2d 260, 262 (4th Cir. 1974). Which test they apply depends on the struc-
ture of the corporation. See, e.g., Athena Auto., 166 F.3d at 290-91. They
apply the nerve center test when corporate operations are decentralized
and spread across a number of states. See, e.g., Diaz-Rodriguez, 410 F.3d
at 61. When a corporation has substantially all of its physical operations
concentrated in one state, they apply the place of operations test. See, e.g.,
Peterson v. Cooley, 142 F.3d 181, 184-85 (4th Cir. 1998).
22
The total activities test incorporates both the nerve center and corpo-
rate activities test. Courts in the Fifth, Sixth, Eighth, Tenth, and Eleventh
Circuits apply this test. See, e.g., Capitol Indem., 367 F.3d at 835-36;
Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 914-15 (10th Cir.
1993); Gafford, 997 F.2d at 162-63; J.A. Olson, 818 F.2d at 411-12;
Vareka Invs., N.V. v. Am. Inv. Props., Inc., 724 F.2d 907, 909-10 (11th
Cir. 1984); see also Assoc. Petroleum Producers, Inc. v. Treco 3 Rivers
DAVIS v. HSBC BANK NEVADA 2793
their approaches generally amount to about the same thing as
Industrial Tectonics, Tosco, and this separate opinion.23
I. Industrial Tectonics and Tosco
In Industrial Tectonics, Inc. v. Aero Alloy,24 the corpora-
tion’s business activities were located in just two states, Cali-
fornia and Michigan. We concluded that California was the
corporation’s principal place of business for the purpose of
diversity jurisdiction, after noting that California accounted
for 61% of sales, 69% of operating income, 64% of receiv-
ables, and the location of 75% of its inventory.25 The Califor-
nia plant also had nearly double the book value of the
corporation’s only other plant in Michigan, and employed
more than 50% of the corporation’s employees.26 Thus, by
every measure, well over half of the corporation’s business
activities were in California. We held that “where a majority
of a corporation’s business takes place in one state, that state
is the corporation’s principal place of business, even if the
corporate headquarters are located in a different state.”27 We
Energy Corp., 692 F. Supp. 1070, 1074-75 (E.D. Mo. 1988). The total
activities test considers factors such as the location of the corporation’s
“nerve center,” administrative offices, production facilities, personnel, tan-
gible property, sales, income earned, and balances these factors based on
the facts of the case. See, e.g., Amoco Rocmount, 7 F.3d at 915.
23
See Danjaq, S.A. v. Pathe Commc’ns Corp., 979 F.2d 772, 776 (9th
Cir. 1992) (deriving the “general rule” that a corporation’s principal place
of business is the location of the “bulk of corporate activity, as evidenced
by the location of daily operating and management activities”); Indus.
Tectonics, 912 F.2d 1090, 1092 n.3 (9th Cir. 1990) (noting that the place
of operations and nerve center tests “can be viewed as particular applica-
tions of a general rule that the ‘bulk of corporate activity,’ as evidenced
by operating, administrative, and management activities, determines a cor-
poration’s principal place of business”).
24
912 F.2d 1090.
25
Id. at 1094.
26
Id.
27
Id.
2794 DAVIS v. HSBC BANK NEVADA
did not apply the nerve center test because California con-
tained a substantial predominance of the corporation’s busi-
ness activities.28 Our approach in Industrial Tectonics was
consistent with our prior decisions, in which corporations
with “substantially all” of their one (and only) business activ-
ity in a single state were found to have their “principal place
of business” in that one state where all the operations were locat-
ed.29
In Tosco Corp. v. Communities for a Better Environment30
we held that the “place of operations” test determines a corpo-
ration’s principal place of business “when a corporation con-
ducts a substantial predominance of its business within a state.”31
The emphasis in Tosco on “substantial predominance,” rather
than “majority,” as in Industrial Tectonics, arose because the
corporation’s business activities in Tosco were more complex
than in Industrial Tectonics. According to the district court
opinion we adopted, Tosco’s refinery business had a majority
of its refineries (63%), half of its lubricant blending and pack-
aging facilities, and almost half (40%) of its refining capacity
in California, but only about a third (37%) of its retail loca-
tions and inventory. California had more than twice the num-
ber of retail locations of any other state.32 Thus, in Tosco we
applied the “substantial predominance” inquiry mentioned but
not used in Industrial Tectonics to analyze a corporation oper-
ating in more than two states, with the majority of its most
important business factor (refineries, since Tosco was an oil
company) and 50% of the important and refinery-related pro-
duction facilities were in California. At least on the facts con-
28
Id.
29
Bialac v. Harsh Bldg. Co., 463 F.2d 1185, 1186 (9th Cir. 1972); see
also New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1301 (9th Cir.
1989); Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 842
(9th Cir. 1986).
30
236 F.3d 495 (9th Cir. 2001) (per curiam).
31
Id. at 497.
32
Id. at 501.
 DAVIS v. HSBC BANK NEVADA 2795
sidered in Tosco, we concluded that a majority of each and
every corporate activity was not required to establish a “sub-
stantial predominance.”33
Neither Industrial Tectonics nor Tosco addressed compa-
nies with no majority of any activity in one state. Tosco was
in the business of making and selling petroleum-based prod-
ucts, and Industrial Tectonics was in the business of making
ball bearings. Both performed these activities largely in Cali-
fornia, where the bulk of their production facilities were
located. Best Buy does not conduct any of its activities largely
in California. Though Tosco says, perhaps in dicta, that a
majority of the corporation’s total activities are not necessary
(Tosco did in fact maintain a majority of its refineries in Cali-
fornia), we have never said what “substantial predominance”
requires when no state had a majority of any activity.
Under Tosco and Industrial Tectonics, application of the
“place of operations” test34 requires “substantial predomi-
nance” of the corporation’s activities in one state.35 “Substan-
tial predominance” itself requires two things, both that
activities in one state predominate, and also that this predomi-
nance be “substantial.”36
33
Id. at 500.
34
Under the “place of operations” test, a corporation’s principal place of
business is the state with a “substantial predominance of corporate opera-
tions.” Indus. Tectonics, 912 F.2d at 1092-93; see also Danjaq, S.A. v.
Pathe Commc’ns Corp., 979 F.2d 772, 776 (9th Cir. 1992); Co-Efficient
Energy Sys. v. CSL Indus., Inc., 812 F.2d 556, 558 (9th Cir. 1987).
35
Tosco, 236 F.3d at 502; Indus. Tectonics, 912 F.2d at 1094; see also
Montrose Chem. Corp. of Cal. v. Am. Motorists Ins. Co., 117 F.3d 1128,
1134-35 (9th Cir. 1997).
36
Cf. Duncan v. Walker, 533 U.S. 167, 174 (2001) (recognizing the duty
to give effect, if possible, to every clause and word of a statute); Exxon
Corp. v. Hunt, 475 U.S. 355, 369 n.14 (1986) (rejecting the reading of a
phrase that made a latter phrase surplusage); United States v. Wenner, 351
F.3d 969, 975 (9th Cir. 2003) (recognizing the same canon of statutory
construction).
2796 DAVIS v. HSBC BANK NEVADA
II. Predominance
The term “predominance” invites arithmetic, but not merely
arithmetic. Judgment is necessary to decide which numbers
matter.
In this case, the district court considered that Best Buy gen-
erates most of its net sales, roughly 13%, in California and
9% of its net sales in Texas, the next-most productive state.
Taking the difference, 4%, it calculated that California
accounted for 45% more business than Texas. Based on the
45% difference between California (the highest37 state) and
Texas (the next-highest state), it concluded that California had
a substantial predominance of Best Buy’s sales. The court
applied similar arithmetic, with similar results, to the number
of Best Buy employees and stores in California. Based on
these percentages of percentages, it concluded that California
was Best Buy’s principal place of business.
It is error to determine predominance merely by comparing
one state to another. “Principal place of business” means prin-
cipal place of business for the entire company. That may be
the whole country for a nationwide business, and all of the
states with its operations for a multi-state business. In the con-
text of determining a corporation’s “principal place of busi-
ness,” “predominance” should be judged against the
corporation’s entire operations, not merely by a comparison
of the two highest states. For Best Buy, determining predomi-
nance requires comparing its California business to the other
48 states, Puerto Rico, and the District of Columbia.
A comparison between the two highest states cannot tell us
whether the highest state has a “substantial predominance”
because it tells us only how one state compares to another, not
37
I use “highest” to mean the state with the most of that factor. Factors
include number of employees, retail stores, inventory, sales, production
facilities. See Tosco, 236 F.3d at 500-01.
DAVIS v. HSBC BANK NEVADA 2797
whether any state so predominates that it is reasonable to call
a multi-state company a citizen of that one state. If a retailer
has operations in all the states proportional to population, and
we determine “predominance” just by taking the difference
between the two highest states, California would be the “prin-
cipal place of business” for virtually every corporation
because of its larger population. Because a comparison
between the two highest states tells us nothing about whether
the highest state predominates for the entire corporation
(which is what matters), the comparison cannot tell us enough
about “substantial predominance” to yield the principal place
of business.
Determining “predominance” by comparing the operations
in one state to the corporation’s national operations is consis-
tent with what the court actually did in Tosco, even though the
words can be read to say we should do what the district court
did in this case. In Tosco, we said that “substantially predomi-
nates . . . requires a comparison of that corporation’s business
activity in the state at issue to its business activity in other
individual states.”38 We applied this verbal formulation by
calculating what percentage of Tosco’s total, national opera-
tions occurred in California.39 It was based on this percentage
of Tosco’s entire operations that the district court found Cali-
fornia to predominate and that predominance to be substantial.40
A hypothetical case illustrates why looking at the differ-
ence between states fails to determine the “principal place of
business.” Suppose a craft bourbon distillery, mostly discov-
ered by tourists who arrange shipments home, ships 1 case of
bourbon to each of the 50 states, except for Alaska, where a
pair of tourists each ordered a case. The distillery sells twice
as much bourbon to Alaska as to any other state, but Alaska
only accounts for about 4% of its total sales. Although Alaska
38
Tosco, 236 F.3d at 500.
39
Id. at 501-02.
40
Id.
2798 DAVIS v. HSBC BANK NEVADA
greatly predominates when compared to any other individual
state (2 cases to 1), it does not “predominate” in a relevant
way, because 4% is not close to a majority of total sales. To
say that Alaska is the “principal place of business” and “citi-
zenship” of this distillery, when none of its employees have
even taken a cruise there, and all of its manufacturing facili-
ties and 96% of its sales occur elsewhere, would be a little
silly. Yet under a state-by-state analysis, we would look only
at the difference between the two highest states by subtracting
the sales in the second-highest state (1 case) from the sales in
Alaska (2 cases), and then dividing by the sales in the second-
highest state (1 case). By this calculation 100% more sales
occur in Alaska than any other state, so we would (errone-
ously) conclude that Alaska “substantially predominates” and
is therefore the distillery’s principal place of business and citi-
zenship.
In order to calculate a useful percentage, one has to pick the
numerator and denominator with a view towards what mat-
ters. Using the next-largest state as a denominator has only a
slight bearing on what matters, substantial predominance of
the business’s entire operations. To determine whether opera-
tions in a state predominate, the proper numerator is business
occurring in the state and the proper denominator is all the
corporation’s business.41 Net sales, tangible property, person-
nel, production facilities, and other factors may be helpful for
determining whether a state is the “principal place of business.”42
Whatever the indicia are, the point of looking at them is to
determine what state, if any, predominates relative to every-
41
Our precedents use the same numerator and denominator. This merely
makes explicit the method for calculating a useful percentage. See Tosco,
236 F.3d at 500-01; Montrose Chem. Corp. of Cal. v. Am. Motorists Ins.
Co., 117 F.3d 1128, 1135 (9th Cir. 1997); Indus. Tectonics, 912 F.2d at
1093-94.
42
See Indus. Tectonics, 912 F.2d at 1094; see also Montrose Chem., 117
F.3d at 1135 (examining the location of the corporation’s tangible prop-
erty, production activities, employees, and income sources).
DAVIS v. HSBC BANK NEVADA 2799
where the corporation operates, not simply where the corpora-
tion has the most activities.
Thus, if a retail company has sales of $65 in California, $20
in Nevada, and $15 in Oregon, the relevant arithmetic is not
($65 — $20)/$20, which only tells us that 225% more sales
occur in California than the next-largest state. It is $65/$100,
which is California’s percentage of $100, the company’s total
sales nationally ($65 + $20 + $15). Although both calcula-
tions tell us that California predominates in sales, only the lat-
ter provides a basis for concluding that California is the
principal place of business because it is the only one that
compares California’s operations to the company’s total oper-
ations in all states. The former calculation only shows how
much more activity occurs in the highest state than the
second-highest state, which tells us nothing about whether
any state has a predominance of its national operations.
If this retail company also had operations in Washington,
and its sales were $40 in California, $25 in Nevada, $20 in
Oregon, and $15 in Washington, the first way (looking at the
difference between states) yields the wrong answer. It shows
a 60% “predominance” by California in total sales, while the
correct calculation suggests California does not predominate
as to sales, because it only accounts for 40% of total sales.
The 60% figure, which corresponds to California’s predomi-
nance over Nevada, is of little use in determining the “princi-
pal place of business” for this regional corporation.
To determine whether Best Buy’s California operations
“predominate,” the relevant comparison is between the per-
centage of Best Buy’s total operations in California and the
percentage occurring elsewhere, not merely to the second-
highest state (Texas). For factors such as sales, employees,
and stores, the numerator is the amount of sales, number of
employees, and number of stores in California. The corre-
sponding denominators are the total sales, total number of
2800 DAVIS v. HSBC BANK NEVADA
employees, and total number of stores for the entirety of Best
Buy’s operations.
As the majority says,43 diversity jurisdiction enables citi-
zens of non-forum states a better chance of avoiding “local
prejudice.” There is more to it, though, than avoiding the sort
of prejudice Southerners might have had a half century or a
century ago toward Yankees. Jurors may have no prejudice at
all against citizens and corporations of other states, but still
have a financial incentive to import their money. This incen-
tive is especially strong when the corporate pockets are deep
and the loss will not affect local employment. That may have
been one of the reasons why Congress modified diversity
jurisdiction in the Class Action Fairness Act.44 Diversity pro-
tects against deep pocket justice as one form of prejudice.
III. Substantiality
Finding a state that predominates nationally does not suf-
fice to establish the corporation’s “principal place of busi-
ness.” The predominance, under Industrial Tectonics and
Tosco, must also be “substantial.”45 “Substantial” does not
mean just more than any other state. Like predominance, sub-
stantiality is judged by comparing the putative principal place
of business to the rest of the corporation’s activities.46 The
“totality of corporate activity,” not just one or several compo-
43
Op. at 2785.
44
See S. Rep. No. 109-14, at 11-12 (2005) (Conf. Rep.) (noting that in
section describing abuses of jurisdiction that “an important historical justi-
fication for diversity jurisdiction is the reassurance of fairness and compe-
tence that a federal court can supply to an out-of-state defendant facing
suit in state court” and commenting on cases where the out-of-state defen-
dant was confronted with “a state court system prone to produce gigantic
awards against out-of-state corporate defendants” (alterations omitted)).
45
Tosco, 236 F.3d at 500; Indus. Tectonics, 912 F.2d at 1094.
46
See Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865
(S.D.N.Y. 1959) (holding that a corporation’s principal place of business
“must be resolved on an over-all basis”).
DAVIS v. HSBC BANK NEVADA 2801
nents of that activity, must be substantial at the corporation’s
principal place of business.47 Thus, in Tosco we held that the
corporation’s California operations were “substantial”
because it had the majority of the corporation’s most impor-
tant activity, its refineries, and 50% of the important and
related production facilities in California. In Tosco no other
state had comparable percentages of the other factors consid-
ered — California had 40% of total refining capacity, and
37% of all retail locations.48 Although California did not have
a majority of every factor, California’s predominance in
Tosco was “substantial” because it had a majority of one of
them, and the other factors’ percentages were close to a
majority and “significantly larger” than the percentages in any
other state.49
There are four reasons why substantiality is essential for
proper application of the “substantial predominance” test.
First, if mere predominance sufficed, no matter how slight,
then a corporation’s principal place of business might change
from year to year, or month to month, based on the routine
vicissitudes of commerce. Second, requiring a finding of mere
predominance, rather than substantial predominance, would
make it likely that district and circuit courts in multiple cir-
cuits might locate a corporation’s principal place of business
in different states, even though each corporation can have
only one.50 Third, a simple predominance test would result in
California being the “principal place of business” for nearly
every national retailer by virtue of its larger population.
Fourth, a “slight” predominance standard would just encour-
age expensive and fundamentally wasteful discovery, motions
47
Cf. id.; see also Indus. Tectonics, 912 F.2d at 1094 (examining all
business activities occurring in California).
48
Tosco, 236 F.3d at 500-02.
49
Id. at 500.
50
See 28 U.S.C. § 1332(c)(1), (d)(10) (specifying that a corporation is
a citizen of the state which is “its principal place of business” (emphasis
added)).
2802 DAVIS v. HSBC BANK NEVADA
practice, and appeals not even focused on whether or to what
extent the defendant wronged the plaintiff, but instead on
where a lawsuit about those matters ought to be conducted.
Litigation is more than burdensome enough without adding a
trial to decide where to have the trial.
The “substantiality” inquiry will not necessarily pinpoint a
state in which a corporation’s business activities substantially
predominate so that it is the “principal place of business.” The
substantiality requirement should actually help identify when,
despite a “predominance,” the “place of operations” test is
nevertheless inappropriate because the corporation’s activities
are not overwhelmingly concentrated in one place. As we
explained in Tosco, predominance is not necessarily “substan-
tial” if other states have comparable concentrations of the cor-
porations’ business activity.51 Assuming a hypothetical
business with 49% of its total activities in California, 46% in
Nevada and 5% in Oregon has a “predominance” in Califor-
nia, we might still conclude that this predominance was not
“substantial” because Nevada has a “comparable” percentage
of the corporation’s total activities and less than half of its
activities are in California.52
To assess whether two states are “comparable,” I would not
depend on“per capita” analysis as the majority does. Dividing
the amount of a business factor in a state by its population, or
vice versa (and thus finding amount of sales “per person” or
number of people “per store”) at most identifies cases where
the activity in a state is disproportionate to population. But
disproportionateness on a per capita basis can arise for rea-
sons having nothing to do with a state being the corporation’s
“principal place of business.”
51
Tosco, 236 F.3d at 500.
52
Id. at 501-02 (examining whether other states had “comparable” con-
centrations of the corporation’s entire operations when assessing substan-
tial predominance).
DAVIS v. HSBC BANK NEVADA 2803
Consider a hunting and fishing outfitter with 1 lodge in
every state except Wyoming, where it has 2. “Per capita,”
then, Wyoming is the highest state with 1 lodge per 260,000
people. The next-highest state has 1 lodge per 620,000 people.
On a per capita basis, the majority’s state-to-state comparison
leads to the conclusion that the outfitter’s physical operations
in Wyoming do “predominate” and that this predominance is
“substantial.” But just as it was for the bourbon distillery, this
conclusion makes little sense. It is just silly to call Wyoming
the “principal place of business” for a company when 96% of
its employees have never set foot in Yellowstone, and 96% of
its physical facilities and central reservation office are located
elsewhere. A “per capita” analysis only tells us when a state
has more or less of a given factor than other states. It does not
tell us anything about what really matters, which is whether
any state predominates for the entire corporation.
Many products appeal to specialized audiences, so that
sales are disproportionately in a few states. For example,
Porsches doubtless sell better to rich people, so richer states
have disproportionately more Porsches, even with a per capita
correction. Is Porsche’s “principal place of business” Califor-
nia, Connecticut, or Washington D.C., just because more peo-
ple in those places than in, say South Dakota or West
Virginia, can afford Porsches? Because car battery blankets,
oil pan heaters, and circulating heaters sell disproportionately
in Fairbanks, is Alaska the principal place of business for the
Outside companies that make them? Not by a sensible attribu-
tion of “citizenship.”
Because the “place of operations” test is only appropriate
for corporations that are truly concentrated in one place,
courts should not struggle with mathematical gyrations to
determine whether a predominance is “substantial.” Where
predominance is not substantial enough to be pellucid, the
“nerve center” test applies.53 Only if the “totality of corporate
53
Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865
(S.D.N.Y. 1959); see also Tosco, 236 F.3d at 500 (requiring the corpora-
2804 DAVIS v. HSBC BANK NEVADA
activity in a given place . . . m[ay] be said to represent the
‘center of gravity’ of corporate function” is the substantiality
requirement met.54
The “nerve center” test55 determines a corporation’s “prin-
cipal place of business” by looking to “where its executive
and administrative functions are performed.”56 “In short,
courts generally assign greater importance to the corporate
headquarters when no state is clearly the center of corporate
activity, and assign greater importance to the location of cor-
porate business when substantially all business operations
take place in a single state.”57 In Industrial Tectonics, we held
that because “a majority” of the corporation’s business activ-
ity took place in one state, that state was its principal place of
business, even though the corporate headquarters were located
in a different state.58 When no state has a substantial predomi-
nance of the corporation’s total activities, we apply the nerve
center test to determine the “principal place of business.”
IV. Best Buy
To determine if Best Buy has its principal place of business
in California, we look at whether California contains a “sub-
stantial predominance” of Best Buy’s business activities. Best
Buy’s business activities consist of its chain of Best Buy retail
tion’s business activity in its principal place of business be “significantly
larger” than its activities nationally); Danjaq, S.A. v. Pathe Commc’ns
Corp., 979 F.2d 772, 776 (9th Cir. 1992) (concluding that the location of
the “bulk” of a corporation’s activities was its principal place of business).
54
Scot Typewriter, 170 F. Supp. at 865.
55
Tosco, 236 F.3d at 502; Indus. Tectonics, 912 F.2d at 1094; see also
Montrose Chem., 117 F.3d at 1134-35; Scot Typewriter, 170 F. Supp. at
865 (setting forth the “nerve center” test).
56
Indus. Tectonics, 912 F.2d at 1092.
57
Id. at 1093.
58
Id. at 1094.
 DAVIS v. HSBC BANK NEVADA 2805
stores that sell movies, music, and electronics in 49 states,
Puerto Rico, and the District of Columbia. There are a total
of 923 retail stores distributed throughout these states and ter-
ritories. These retail stores employ 126,837 people nation-
wide, and generated about $31.7 billion in net sales in 2008.
To service these retail stores, Best Buy Stores owns or leases
9 distribution centers, which have 6.3 million square feet of
space.
California has 103 of Best Buy’s 923 total retail stores, or
11%. Of Best Buy’s 126,873 employees, 16,033 (13%) are in
California. Of its $31.7 billion in total sales, California
accounts for $4.21 billion (13%).
Unlike in Industrial Tectonics and Tosco, Best Buy does
not have a majority of any activity (employees, stores, etc.)
concentrated in California. Instead, somewhere around 87%
to 89% of Best Buy’s total operations are outside of Califor-
nia, as is all of its national management. With far more than
half of all activities occurring outside of California, I cannot
conclude that Best Buy’s California operations predominate,
let alone “substantially” predominate. Were we to accept the
district court’s conclusion that Best Buy is a California citizen
because it does more business there than in Texas, the Eighth
Circuit and the district courts in Minnesota, where all of Best
Buy’s national management and administration take place,
would rightly scoff.59
I do not get to comparisons of one state to another, as the
majority does and we did in Tosco, because California does
not have a predominance of any factor in Best Buy’s total
activities. Absent “predominance,” there is no occasion to
judge whether the (nonexistent) predominance is “substan-
tial,” which one might do by asking if states have “compara-
59
See, e.g., Capitol Indem. Corp. v. Russellville Steel Co., 367 F.3d 831,
835-37 (8th Cir. 2004) (applying total activities test to determine the
“principal place of business”).
2806 DAVIS v. HSBC BANK NEVADA
ble” percentages of the corporation’s entire operations.60
Finding two states that are “comparable” means any predomi-
nance is unlikely to be substantial.
Since there is no state in which Best Buy conducts a sub-
stantial predominance of its business activities, I would apply
the nerve center test to determine its “principal place of busi-
ness.” Minnesota, the location of Best Buy’s corporate head-
quarters, is thus its principal place of business. Best Buy is a
citizen of Virginia, where it is organized, and Minnesota,
where it is managed. A company only gets two citizenships,
so it cannot have a third where it merely has more of some
activity or activities than any other single state.
Though I concur in the result, I would confine Tosco to its
facts, and clarify both the “place of operations” test itself and
when it applies. Comparison of individual states generates
expensive, unpredictable, and pointless litigation about corpo-
rate citizenship, likely to lead to intercircuit conflicts about
where national business are citizens.
60
See Tosco, 236 F.3d at 501-02.